There is a desire for entities to stabilize their costs or to determine their future costs in advance. In the past, negotiated rates were sometimes used by buyers to reduce future costs. In some instances, negotiated rates involved an agreement that states that if the buyer purchases a specified amount of goods or services before a specified time, the buyer will receive a predetermined discount from the prevailing fair market value for the goods or services desired. However, a disadvantage of certain types of negotiated rates is that the buyer may not be given specific information as to the exact cost of the product or service being purchased until the time for payment for the product or service has arrived, because only a percentage discount may be known at the time of negotiation; the knowledge that one would receive a 25% discount is useful, but the cost may still be uncertain, as it may be unknown from what price the 25% discount is taken.
A derivative is an item that derives its value from another, more fundamental item. An example of a derivative is a promise or contract to buy a product or service at a set price at a certain time in the future. Derivatives and the exchange of derivatives through an automated exchange provides an opportunity for both the supplier and the buyer to hedge against the risks associated with volatility in the various markets. For example, the events of Sep. 11, 2001 led to a downturn in various aspects of the travel industry. Had an exchange that traded a significant volume of travel derivative products existed at that time, it is possible that the economic impact could have been lessened to a certain degree. There would have been guaranteed revenues for suppliers in the market due to then-existing futures contracts. In addition, there may have been speculation in the derivatives market that may have generated revenues through the buying and trading of options as prices dropped. Such speculation may result in trading, possibly resulting in a more stable economic situation.
Thus, it is desirable to provide a method and system to allow entities to obtain more competitive pricing for various goods and services though the use of derivatives.